Sandvik AB

STO:SAND

Earnings Call Transcript 2020-Q2

[Emelie Alm, Investor Relations Officer]

Hi, everyone, and welcome to the presentation of the second quarter results of Sandvik. We will go through the presentation, followed by a Q&A session. And my name is Emelie Alm, and I have just joined the Investor Relations team here at Sandvik. And with me today, I have our President and CEO, Stefan Widing; together with our CFO, Tomas Eliasson. So over to you now, Stefan, to start.

[Stefan Widing, President, CEO & Director]

Thank you, Emelie. And I would also like to welcome you to this second quarter report for Sandvik in 2020. I think it's fair to say it's been a long quarter as we have experienced more things in this quarter than we usually experience over the course of years. And it's been a challenging quarter. We, of course, started to see a sharp decline in our short-cycle business over the end of March, a decline that accelerated into April. We also saw mines closing down in several parts of the world. And then continuing into May, we had volatility in the oil price, which started to impact our oil and gas segment. Overall, our orders dropped by 23% in the quarter and revenue by 20%. We are still proud that we were able to deliver a resilient earnings performance in this environment. The adjusted operating margin came in at 14%, 14.4% if we exclude metal prices. We could do this, thanks to a strong delivery on the savings side, we delivered about SEK 1.5 billion of savings in the quarter, and Tomas will, in his presentation, detail that a little bit more for you. On a rolling 12-month basis, our adjusted EBIT margin is now at 17%. We also continue to have a strong balance sheet. We delivered SEK 2.5 billion in cash flow in the quarter. We reduced our inventories, and our net gearing is now at a low 0.11. Also in the quarter and in July, we announced or closed 3 new acquisitions, and we also concluded on an important divestiture. Also want to take this opportunity to do a call-out to the supply chain and operations part of the company. As throughout this whole period, we have managed to continue to deliver products and services to our customers, not because it has not been challenging, it's been huge challenges to do this, but the team has stepped up and ensured we could continue to deliver throughout this whole period. Then if we start around second half of May, we started to see things opening up. We saw Europe opening up a little bit. We started to see mines across the world in at least most parts of the world starting to open up. And we started to see some signs of recovery towards the end of June. But I want to emphasize that in our business, we didn't really see the recovery starting until the very end of June. If we look now in the first weeks of July, we continue to see this trend and the SMS short-cycle business is currently operating at around minus 20% to minus 25% compared to last year. I also want to emphasize that it is a dynamic situation. So I wouldn't read too much into specific weekly numbers. We do -- however, if we look at our main or key customer segments, such as automotive, aerospace and oil and gas, we expect to see a fairly slow recovery going forward. If we look a little bit at the market development, we can see that our main regions, Europe and North America are both down 30% or more in the quarter. Asia looks better at minus 12%. This is a little bit hiding the fact that China is fairly strong. China is actually a positive 5% for us in the quarter. But on the other hand, other parts of Asia, especially driven by India, is weak as they have been severely hit by lockdowns. The other regions we have is primarily driven by mining. And then since most of the arrows here when it comes to year-over-year is pointing downwards, we have added some additional information to this slide. In the gray boxes here, you can see the sequential development throughout the quarter. So if you see an arrow pointing upwards, it means that the second half of the quarter was stronger than the first half of the quarter. And if we take the geographies first, we can see that in Europe, we definitely see things starting to opening up towards the end of the quarter. In North America, we are not really seeing that as of yet, it's more moving sideways. Asia also shows sideways. It's a little bit hiding the fact that China was very dynamic also towards early April when they were in the recovery phase from their lockdown. Then they went down but have now started to become stronger again in June, primarily driven by domestic demand, while the rest of Asia is not really showing signs of progress yet. And then Africa, Middle East and Australia, mining markets, where we definitely see an improved sentiment on the mining side. South America, however, because of the pandemic situation, if anything, is looking a little bit worse. From a segment perspective, mining, we saw closures impacting us in primarily April and May, with some significant impact, especially on the aftermarket business. But we saw a pretty significant recovery in June. And in June, overall, the aftermarket business was more or less flat. The overall sentiment has been quite good in the mining, with commodity prices holding up, and we also booked some good orders at the end of June here. General engineering is the segment that had held up the best for us in general. But on the other hand, it also means that we haven't really seen a strong recovery as of yet in that segment. Automotive hit very hard early in the quarter. Here, we do see some signs of recovery, and we also saw some encouraging new data on new car registrations coming in, in June. But of course, there's also a lag for us in our supply chain here. Energy, because of the oil price disruptions in May, we have seen that one worsening throughout the quarter. Of course now the oil price has improved a little bit. We see a small improvement in the short-cycle business towards the very end of the quarter, but the longer cycle business, even at this oil price because of the general uncertainty, we don't see any comeback in the CapEx on that side. Construction has been hit a little bit harder than mining. And there, we have not seen any general trend upwards as of yet. Aerospace hit very hard in the beginning of the quarter, but if anything, that sentiment has continued to be weak and maybe even slightly worse throughout the quarter after announcement from major suppliers and producers in this space that they expect demand to be muted for quite some time going forward. So if I summarize again, order intake minus 23, revenues minus 20. Dropping 1/5 of the top line is, of course, severe, and that's why we are also very proud to be able to deliver a margin of 2.8 -- or an EBIT of SEK 2.8 billion in the quarter. A margin of 14%, 14.4% if you exclude the metal price impact, which means that we have a group leverage of minus 37%. And this is something we are happy with considering a minus 20% reduction in the top line. We also, in this number, have managed an 80 basis point reduction in the margin due to lower production rates as we have continued to reduce our inventories. So a resilient performance, driven by good savings of SEK 1.5 billion and a rolling 12-month number staying at 17%. Going a little bit more into the business areas. If we start with SMRT, an order intake of minus 10%, revenues of minus 12% and a very strong margin of 19.3%. They improved their margins despite the 12% drop on the top line, which is very strong. If we look at the orders, the equipment side is down in the single digit, minus 6%, partly driven by some good orders that I noted at the very end of June. On the aftermarket side, we've noted significant declines in the first 2 months, flattish market in June. In total, it came into the low teens of minus 13%. Their strong margins were attributed to good savings in the quarter of over SEK 400 million. And we should also note that they announced an acquisition of a U.S. distributor on the breaker side in July. Moving into SMS, they were definitely the one that was the most challenged from a revenue perspective as expected. Order intake was down 35%, revenue was down 32%, that includes a 1% dilution from the Wolfram business, so the underlying cutting tool demand was minus 31% in the quarter. Europe down 33%, North America down 40% and Asia down 18%. China was down 4% in the quarter, so definitely stronger than the rest of Asia, and primarily driven by strong domestic demand, while the Chinese export or key accounts were also suffering. In addition to this, of course, our aerospace and automotive were the hardest hit segments, and here we took a material impact of minus 50 or even slightly worse in the quarter. We did see, however, especially then automotive starting to come back at the end of the quarter. SMS still delivered an EBIT margin of 12.8%. This is an operating leverage of 47%, which, for a 32% drop in the top line for SMS, is a really strong performance. You can compare this to the performance in the global financial crisis. This is, of course, driven by strong savings. They delivered SEK 950 million of savings in the quarter, meaning close to SEK 1 billion in a single quarter in savings, which is a very strong performance. They were also impacted 140 basis points by lower production rates as they continued to bring down their inventory. Here, we also announced 1 acquisition that closed and one, a new acquisition, was announced in the round tool space in this period. And yesterday, we also announced a reorganization of SMS into 2 segments to continue to drive growth in this business going forward. Moving then into SMT, of course, very challenged on the order side, driven by CapEx in oil and gas and aerospace. They saw both an impact from the short-cycle driven by the general COVID scenario and then the disruption in the oil price. Order intake of minus 33%, this would have been minus 28%, excluding the major orders. Revenues of 13%, significantly better as they have delivered from their backlog in both oil and gas and in aerospace. And an underlying profit of 9.3%, which is a leverage of minus 31%, which is also strong for SMT with a double-digit decline on the top line. Here, the main concern has been the drop in the oil price and the impact it has had on the order backlog and order intake on oil and gas side. And we have seen a cancellation and several delayed or pushed-out orders on the oil and gas side for SMT. We have a backlog for about another quarter, but we expect after that it will be a tough period for them until this market has stabilized. Other than that, also, they were impacted 130 basis points by lower production rates, as also they brought down their inventory and the margin was supported by over SEK 100 million of savings in the period. And with that, I'll hand over to Tomas to take us through the numbers a little bit more in detail.

[Tomas Eliasson, Executive VP & CFO]

Thank you very much, Stefan. And let's jump straight into the financial summary, lots of interesting numbers to go through today. So if we start in the upper right-hand corner, the top line orders, minus 23% and revenues minus 20% organically, as you've heard. Currency impacted 2% negative on both orders and revenues and structure, which in this case is mainly the divestment of Varel Oil & Gas, impacted minus 3% and minus 2%. So all in all, minus 27% for orders and minus 24% for revenues. If we then walk down the income statement, earnings came in at SEK 2.8 billion, that's 43% down or 40% down if we take out metal prices. The margin was 14% compared to 18.8%, and we'll go through the bridge in just a minute and talk more about that. The finance net was plus 20% compared to minus SEK 387 million a year ago. Here, the interesting part is the interest net, which is coming down nicely, steady. We'll talk about that as well in a minute, the details. The underlying tax rate came in at 24.3%. Working capital was flattish. Of course, the relative number came up on the back of reduced revenues. Cash was strong, plus 14%; returns, 12%; and earnings per share decreased with 38%. So let's then go into some of these details, and we'll start with the bridge. And of course, the organic decline, minus 20% on the top line is SEK 5.2 billion. The EBIT impact was minus SEK 1.9 billion. So that's 37% down, a dilution of the margin of 4.3%. Of course, 20% down on the top line and minus SEK 1.9 billion or minus 43% on the earnings is a big number, of course, nothing to be happy about. But we're satisfied with the performance. And we'll talk a little bit more about that on the next slide. Currency was a little bit accretive. Metal prices diluted the margin and structure was flattish. But let's return to the leverage here and the organic development, minus 37%. What is behind this number? Of course, a big volume drop, but then, of course, savings, the savings that Stefan talked about. If we look at this slide here, and we're going to go through this in some detail. These are the savings programs that impacted the income statement in the second quarter. And it's a little bit different here. The first one is the savings program -- permanent savings that was launched mid-2019, which is now fully executed, SEK 1.7 billion annualized and SEK 425 million hit the income statement in the second quarter. There will be bridge effects, of course, mainly in Q3 and Q4 this year and a little bit in Q1 2021. But when we look at this program here, we mustn't forget that we were actually in a business cycle downturn already from mid-2019. So this is just a continuation of those mitigating activities that sort of hits the income statement now. The second and the third line are the temporary savings that we have initiated in March and April this year as we went into the COVID crisis. The first one are the short-term working weeks, work time reduction. You can see the impact by business area, and we see the total number, SEK 600 million. We communicated SEK 1.5 billion for the year. So this is being executed, even a little bit more, a little bit better than we said. So it's moving along according to plan. On the next slide, we have the discretionary spend or just a spend, everything which is not personnel expenses. And of course, when people are locked down or, say, work from home, don't travel anywhere, you get reduced air travel. We don't have conference, you don't meet customers, et cetera, et cetera. And this is much more than we had maybe expected, but SEK 500 million for the quarter. So overall, SEK 1.1 billion in temporary savings, plus the SEK 400 million from the previous program, that's the SEK 1.5 billion in total, which impacted the income statement. Now let me just remind you, don't get too excited about these numbers because I'm talking about the temporary savings now, because these are temporary savings. And as the economy and the business cycle recovers, as the demand increases, as the output increases, et cetera, et cetera, work time reduction will go down, discretionary spending savings will go down as well. So this will eventually fade out some time in the future. So don't extrapolate these savings out to the stars or into the sky because we will not have SEK 1.1 billion every quarter. The big question for us here is how will we enter 2021, really, at what level? And some of these short-term savings has to be replaced with permanent savings. And at the very bottom, you can see right now, the expected savings from the new program of permanent savings that we have talked about in Q2, both in March and in June, the savings number is SEK 1.3 billion. We made a big provision in Q2. For parts of this program, we will make more provisions for that during the second half of the year. We haven't given you a split by business area, but that's because we're not done yet. So as soon as we're done, as soon as we have our arms around all these moving parts of this program, we will communicate to you how this is split by business area. And SEK 1.3 billion is maybe not enough. It could be even more depending on how the business cycle develops in the future. Now if we stay for a few more seconds on this slide here, you see this number, SEK 1.5 billion in the quarter in savings. If we go back one slide here to the bridge, take the SEK 1.9 billion drop in EBIT here in the organic column here and just assume that we didn't have these savings, then we would have a negative leverage of somewhere between minus 65% or minus 70% or something like that. And that is exactly the negative leverage that we had in the finance crisis in 2009. So this is all the difference, stay ahead of the curve, take decisive action, have a decentralized organization with decision makers close to the customers so we can be ahead 3 to 6 months, instead of being behind 3 to 6 months and chase our own tail. Okay. So on that happy note, let's move to the finance net. The finance net came in at plus 20%. But the important thing here is the interest net on the first line, plus -- oh, sorry, minus SEK 90 million in the quarter compared to minus SEK 144 million a year ago. We have lower debt compared to the same quarter a year ago. And the market has kind of, let's say, normalized. So the swap rates, et cetera, are more better now. If we look at tax rate, we reported 28.1%, but that's heavily impacted by one-offs, restructuring charges in the income statement, which are not tax deductible, some of it. If you take that away, we're on 24.3%. And that's well within the range of 23% to 25%. Net working capital. If you look at the left-hand graph here, you can see that normally, we have a pickup of working capital in Q2 compared to Q1. And that's the buildup before the summer season or the vacation season when you closedown factories for annual maintenance, et cetera. This did not happen this year. It's kind of more flattish. The reduction you see here in the graph is currency-driven. So it's kind of flat. We're very happy with the inventory management, especially in SMS and SMT. Of course, that means that the relative number goes up, and you can see that on the right-hand side. Cash flow, look at the right-hand side here. Earnings goes down, more than SEK 2 billion. On the other hand, we don't have the buildup of net working capital. So that meant that we came in with SEK 2.5 billion in cash flow compared to SEK 2.2 billion a year ago, plus 14%. The net debt continues down. Gearing, 0.11. The financial net cash position is plus -- is SEK 3.5 billion. The total net debt position is SEK 7 billion. And just as we said after Q1, we have more than SEK 30 billion in accessible cash, cash, undrawn credit lines and committed credit lines. So no change in that. If we look a little bit on the guidance here, we guided underlying currency effects of plus SEK 100 million, came in at minus SEK 86 million, the big difference is the strengthening of the Swedish krona, mainly against the dollar. Total currency effect was plus SEK 28 million. Currency effect -- oh, sorry, metal price effect was minus SEK 76 million compared to a guidance of minus SEK 150 million. CapEx was SEK 0.8 billion, interest net was SEK 90 million and tax rate, 24.3%.If we then take a look at the guidance for the third quarter on the items that we guide for. And the full year guidance, we have one change, and that's the first one, CapEx. We have said SEK 4 billion for quite some time now. We now have changed that to SEK 3.5 billion or less as we pull the breaks and are being much more careful all over, not only with expenses, but also with the CapEx. Currency effects for the third quarter is estimated to minus SEK 250 million. Metal prices, minus SEK 50 million. The interest net, we keep the guidance minus SEK 500 million. Of course, if you look at the minus SEK 90 million, that would indicate that it would be somewhere less than minus SEK 500 million, but we'll stick to the minus SEK 500 million for the time being. And the normalized tax rate, we keep that 23% to 25%. If going anywhere, it's going down more towards 23% than 25%, but we will not change the guidance now. We'll see 2021 where we will guide you then. And with that, I hand back to Stefan for conclusions and summary.

[Stefan Widing, President, CEO & Director]

Thank you, Tomas. Yes. So again, it's been a challenging quarter, but we are very happy that we have been able to deliver a resilient earnings performance in the quarter. Strong support from good savings of SEK 1.5 billion. And we are now shifting focus to ensuring that some of that is converted into the appropriate level of more prevalent savings to make sure that we go in to 2021 with the right cost structure. We continue to have a strong balance sheet. We delivered good cash flow in the quarter, and we have strengthened our net cash position. We do see signs of recovery towards the very end of the quarter and it continues into July. Then, of course, since we expect still that it will be a fairly slow recovery, it's important that we also work on creating our own growth. And we have taken initiatives in SMS. We are doing a reorganization to increase the future growth prospects in that business. In addition to that, we will leverage our strong balance sheet to do strategic acquisitions when it is possible. Overall, I would say we still remain positive. We have shown in this quarter that we will adjust to whatever market developments that will come ahead here. Thank you very much. I'll hand over back to Emelie.

[Emelie Alm, Investor Relations Officer]

Thank you. We will now start the Q&A session, and we will start with questions from the conference call. [Operator Instructions] So operator, please.

[Operator]

[Operator Instructions] And our first question comes from the line of Magnus[Audio Gap]

[Magnus Kruber, Associate Director and Research Analyst]

Magnus here with UBS. A couple of ones from me. Thanks a lot for the commentary on the early July trading SMS. That's obviously very helpful. But could you give us some extra details on those numbers as it comes to the different end markets in your manufacturing, auto and aerospace? That would be very useful.

[Stefan Widing, President, CEO & Director]

In general, relatively speaking, automotive is recovering more. General engineering, as I said, it never really went down as much as the others. So it's also more stable now from that perspective, a slight upturn there as well. Aerospace, I would say, no specific recovery, driven by more long cycle order books and so on. And I think that will continue to be challenging going forward. From a geographical perspective, it is Europe and China that has been driving the recovery more so than North America. North America is still going sort of sideways. In general, I guess you could say it follows pretty well at the news cycle in terms of the development of the virus and the lockdowns or opening up of countries and businesses.

[Magnus Kruber, Associate Director and Research Analyst]

Got it. And the minus 50, 55 you said it was through the quarter for both those end markets, aero and auto, right?

[Stefan Widing, President, CEO & Director]

Yes. Overall, for the full quarter, both of them were down in the minus 50 range.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Perfect. That's great. And secondly, on the savings, could you give some flavor on how much temporary cost saving we should expect through the course of the remainder of the year? And secondly to that as well, I think, Tomas, you commented that short-term cost actions would ultimately have to be replaced by some more permanent cost savings. And I guess that's what you're doing. But did that comment also sort of suggest that we have more permanent cost savings to come since there is a quite big difference between the level of temp savings and long-term savings you've announced so far?

[Tomas Eliasson, Executive VP & CFO]

Yes, I can start. The temporary savings we have previously talked about an in-year effect of SEK 1.5 billion. And that number is still valid. So we did SEK 600 million now in the second quarter. So there's -- yes, well, maybe SEK 900 million to SEK 1 billion for the remainder of the year. So that guidance is still where it is. But then on permanent savings...

[Stefan Widing, President, CEO & Director]

Yes. We have the programs we have launched. We said SEK 900 million -- or actually SEK 1 billion included the January announcement and March announcement in Q1. We upgraded that in June to the SEK 1.3 billion. We will continue to evaluate that situation. It all depends on where we believe we will start in 2021. For 2020, we can do with these programs and temporary savings. So it's all about now to adjust to the right level in 2021. And depending on what we see, we will adjust that figure. Obviously, the later we take the decision, the better, the more information we have. On the other hand, there are lead times in implementing the savings. So that's the trade-off. But we will continue to evaluate that, and the number can change, but it all depends on how the economy and the business evolves.

[Operator]

Our next question comes from the line of Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

It's Klas from Citi. So a couple of questions from me. I want to come back to, first, the July comment. And obviously, we are bottoming, but expectations are there might be -- might have been for a quicker pace in July. You say that you see this in autos, in China and in Europe, less so in Americas. But could you, Stefan, help us with the detail within the 2025 by geography? Are we talking Europe down 10%, 15%; Asia, down 5%; and then similar declines that we saw in Americas down 40%? Just so we get a sense by geography within that July number, that would be very helpful.

[Stefan Widing, President, CEO & Director]

First of all, let me say, I think you should be very careful to overread a few weeks here because we are in a very dynamic, fluid situation, if you will, and just like what we said minus 25 end of -- last week of March. I mean if we would have taken that 1 week forward or backwards, the numbers changed by 10 -- 1,000 basis points. And now when we have started to see the recovery here end of June, I mean, I have also, of course, seen some of your expectations. And I think many of you seem to have expected things to have started to recover quicker in June. I think it's also a lot -- a matter of just timing of a couple of weeks here. And when we are now in what is hopefully some form of recovery phase, the weekly numbers change much more than we have ever seen before. So do be careful when you interpret these numbers for just a few weeks. If we have had this call 4 weeks later, we could probably have given a more robust number in terms of how you could use it for predictions going forward. So therefore, I don't think we should go into too much of these details as well because I simply don't think it's too much information in them. But as a general guidance, yes, North America, more sideways, it's not minus 40%. It's better than that. Europe and Asia then recovered slightly more. So you can read into that Europe is a little bit better than that. And Asia, based on that, they were at minus 12% for the quarter and then have recovered also a little bit, thanks to stronger China. Yes, I think that's the best guidance we can give in that sense.

[Klas Henrik Bergelind, Director]

Stefan, I appreciate it. It's very fluid. And my second one is on SMT. And you had -- Stefan, you previously said that you get to make up your mind on the potential separation. I just want to confirm that this comment relates to the macro uncertainty rather than that you might be of a completely different opinion strategically on whether it makes sense to separate SMT because if we strip out the temporary savings and if we adjust for the metal price impact, the margin is very solid here at 7% given the backdrop. And of course, the backlog is going to sort of see revenues decline. But it looks pretty reassuring. So I just want -- would like to get your comment again, Stefan, on whether this is macro rather than -- what do you think about this from a strategic point of view?

[Stefan Widing, President, CEO & Director]

First of all, thanks for the credit you gave to the SMT business. They are not used to that. So I think they appreciate that. No, I mean, I don't think anything has changed from a strategic point of view compared to about a year ago when the announcement was made in terms of starting the internal separation. That project is progressing. It's slightly delayed because of countries locking down and making some administrative processes more difficult. In my view, it's a solid business. It's leading in its market. It's high-performing compared to its peers. Of course, the question though is, is Sandvik the right long-term owner? And from that perspective, I don't think anything has changed. Obviously, the final discussion is still to be had in the Board later this year, most likely.

[Operator]

Our next question comes from Max Yates from Crédit Suisse.

[Max Yates, Research Analyst]

Just my first question is on mining and the performance of the equipment business. You mentioned obviously good large orders. Is there any sense of whether you took some market share in the quarter on these -- on the large orders that were available? Or do you think this was just a relatively buoyant quarter in terms of market activity?

[Stefan Widing, President, CEO & Director]

It's difficult to answer without having seen, let's say, where the others are. I know at least some of them were not Sandvik mines before the order was won. But whether that is, overall, can be interpreted more widely, I don't want to speculate on that. But I would say, overall, we feel confident and we are happy with the performance of the order intake and the business performance on the mining side, including the equipment.

[Max Yates, Research Analyst]

Okay. And just a follow-up question is on the organizational change in SMS. So the carve-outs of the additional -- the additive manufacturing within that sort of separate business units, are you happy with the current levels of investment organically that are going into that business? I'm sure we'll talk more about M&A in the future. But specifically on the organic investments there, are you happy? Or would you like to see kind of investments in that part of the business stepping up?

[Stefan Widing, President, CEO & Director]

I don't think the level of investments is the problem in either direction, so to say. I do believe that we could be more sharp in the -- in more detail what we are investing in, ensuring we invest in the front line in business growth and maybe a little bit less in, let's call it, staff-type activities. So that is something we are changing as part of this. But the overall level of investment, as I see today, I think, is okay. Then as part of this change is that I will get even closer to this because I think it's important for the future. And as part of that, we'll see if I come to a different conclusion. But as of now, that's how I see it.

[Operator]

Our next question comes from the line of Sebastian Kuenne from RBC.

[Sebastian Kuenne, Analyst]

Gentlemen, just a bit more comments on SMRT. We see excellent copper price development, gold price on a record high. It's a big chunk of the SMRT business. So would you guys be surprised if the new equipment orders have a complete turnaround this year and go positive towards the end of the year? And at the same time, with the strong utilization of the equipment, would you think that service business is also strongly improving? That would be my first question. And secondly, on SMT, umbilical tubes, I think that's kind of a dying business at the moment because offshore is completely dead. Are you preparing for kind of a restructuring effect? Or let's say, is SMT one of the businesses where you see more permanent restructuring, more permanent capacity cuts in the coming months?

[Stefan Widing, President, CEO & Director]

If I start with SMRT, I mean it all will come back to what we believe the metal prices will go. You're absolutely right. Right now, it looks very good. Gold, copper, even iron ore and so on. I guess the small question mark here is what is driving this? Is it underlying demand? Or is it also, let's say, worries around supply because there are still closures and difficult pandemic situation in some important parts of the world. I would be more confident if those issues goes away and we are more confident that it's underlying demand that is driving these prices. Until we see that, I still think we are quite cautious and careful in the predictions here. But if these prices would stay, then what we have seen is mining CapEx, in our view, our numbers say that they should continue at the level that they have been on, which should indicate not a booming business, but at least a robust business. And that should also continue to drive decent performance on the aftermarket side. On the SMT question, I mean, they did the announcement in June on layoffs to adjust for 2021. I think Göran and his team there are very close to that business. They manage it in a very stringent way. If they see a need to do more, they will do more. If they feel going forward here that they have done enough, then that's also the conclusion. So I don't want to speculate. We will evaluate or we continue to evaluate these things on a monthly basis. We have been on a weekly basis, but maybe now more on a monthly basis, what actions we need to take going forward. So I'm not saying no, I'm not saying yes to that. It will depend on how the market develops.

[Sebastian Kuenne, Analyst]

Yes. And that would mean that you also consider the divestment even if the high-margin offshore business is completely -- is disappearing for the next years, would still consider the disposal or divestment, is that correct?

[Stefan Widing, President, CEO & Director]

The market environment is a factor in the decision more as a general comment. I mean there are times when you prefer to do this versus not. But they can perform and deliver even with that business being challenging. So that is not, let's say, a hard condition to continue that that business needs to be back at a full level.

[Operator]

Our next question comes from Maddy Singh from Bank of America.

[Madhvendra Singh, Research Analyst]

Just a couple of questions. Firstly, just following up on mining. We did hear about the exit rates in SMS side, but could you also talk about exit rates in the mining side, especially the differences between aftermarket and equipment trends as well? And secondly, on the margins within SMS, would you say that we are past the worst trends? Especially in terms of the leverage you have been seeing, would you expect the leverage especially to go -- improve going forward?

[Stefan Widing, President, CEO & Director]

So if I understand you correctly, your first question was more around the later phases of the quarter in mining and the trends there.

[Madhvendra Singh, Research Analyst]

Yes.

[Stefan Widing, President, CEO & Director]

On the aftermarket side, we definitely saw an improvement. As we said, June was essentially flat on the aftermarket side. And then if we were minus 13% for the quarter, you can understand that it was a fairly significant improvement in the final month. Equipment, I usually say, I mean, we don't want to -- or it's difficult to draw any trends in terms of short couple of weeks because it's bigger projects that come in, in lumps, so to say. So I don't think we can draw any general trend conclusions there. What we can say is that the underlying sentiment has been quite okay in the industry, despite this, driven by still good commodity prices. And we were encouraged by some of the orders we won at the end of June, which -- the orders we book is for the next 12 months of equipment but overall it's bigger projects. So we were confident and encouraged that those deals are still progressing. So I think the underlying sentiment is quite okay on the equipment side. When it comes to margins in SMS, as we said, we are happy with what SMS delivered in this quarter, considering their production rates and the drop in the top line. And assuming that we don't have new major lockdowns, so we go backwards in the general trend. Yes, I think we should have -- we should see them improve as their top line improves. Obviously, the leverage upwards will not be as strong as before, simply because the leverage downwards wasn't that strong. So they will have to, as Tomas said, also start to open up some of the discretionary spend and so on as the market improves. But yes, that's it.

[Madhvendra Singh, Research Analyst]

On the mining side, is there any major markets, which are still under lockdown and causing few concerns, especially around the aftermarket side?

[Stefan Widing, President, CEO & Director]

Yes, there are regions in South America, there are mines being closed for pandemic reasons. There are some locations in Africa, either because of the virus or for political reasons. But it's more, I would say, spot-based, if you will, rather than big closedowns in major part of the continents. So it's more manageable, but we're still not fully out of the woods. And that's what I said. This is what we would like to see when this goes away, what this will do to the commodity prices as well because there is at least a theory that these worries around the supply is also maybe holding up some of the prices a little bit.

[Operator]

Our next question comes from Andrew Wilson from JPMorgan.

[Andrew J. Wilson, Analyst]

Just a couple from me. On the -- I guess, it's a group-wide question, but I'm particularly interested in SMS. What sort of indications are you getting from your customers with regards to the usual summer shutdowns? I'm just trying to think, obviously, very unique profile as we've kind of gone through the Q2 and this year more generally. And I'm just trying to think about how they might be adapting their plans and how that's impacting how you think about the business this year.

[Stefan Widing, President, CEO & Director]

Yes. It's a good question. We have heard of some customers that will shorten sort of vacation stops and so on to produce either to catch up with order backlog or to sort of address sort of a pent-up demand. But -- and to be fair, that's a little bit what we saw in China in March. They were completely locked down in February. They were booming in March, and then they came down again early Q2 as they sort of came back to the underlying demand. We don't know if we will see that in other parts of the world. And there are some indications to what you say, but it's not that we have gotten any, let's say, significant feedback that we should expect that they have -- they open up -- or they are open more or significantly more. I think many companies are aware of this as well. I mean if you're sitting at an order backlog, you will also look at the incoming orders before you decide to work through the holidays here.

[Andrew J. Wilson, Analyst]

Yes. And then just second question is probably for Tomas. Just thinking about inventories, Tomas, and clearly, there's a lot of moving parts, given there's a sort of structural, I guess, desire to reduce inventory levels across the group or at least improve working capital but you've obviously got falling sales. So some of these ratios move around quite quickly at the moment. Just trying to think about how you're thinking about inventories in Q3 and any help you could give us in terms of, I guess, under production potentially in the Q3 bridge, and just how to think about that a bit more generally.

[Tomas Eliasson, Executive VP & CFO]

I think I'll hand that over to Stefan to talk about the production rates.

[Stefan Widing, President, CEO & Director]

Yes. We went into Q2 with saying and with the approach that we were going to produce roughly in line with demand, in particular in SMS. And that statement still holds. We might see slightly declining inventory because of our summer breaks, not material, but a little bit. But the general approach is to produce now in line with the demand. SMS is at, I would say, good inventory level. Of course, in percent of sales, it might look a bit high, but we also have to factor in service levels and so on and the total product offering they have and so on. So we think they are at a quite good level, but it could be reduced a little bit further. If we reduce it too much, we will have an issue once if things start to pull again and catch up with that amount. So we don't want to go too low.

[Operator]

The next question comes from Andreas Koski from Nordea.

[Andreas Juhani Koski, Analyst]

I would like to come back to the cost savings. You had temporary cost -- because I didn't really get you, Tomas, when you talked about the temporary cost savings going forward. Because if I read your press release from July, you are saying that you expect temporary short-term actions to generate savings of about SEK 1.5 billion. And I think that the temporary savings gave you SEK 1.1 billion in savings in this quarter. So there would only be SEK 400 million left according to that. But it sounds like you are excluding the other temporary savings when you were talking about the SEK 600 million and the remaining SEK 900 million. So could you please explain that, and what we should expect in terms of total temporary savings in total for the year?

[Tomas Eliasson, Executive VP & CFO]

Yes, of course. The SEK 1.5 billion that we talked about in the press releases, both in June and in late March, that was basically referring to short-term working weeks. That's the SEK 600 million that we had in this quarter. And that statement stays. What we, let's say in a positive way, underestimated was the temporary spend savings or discretionary spend savings, which is travel and meetings and conferences and all that. We had -- we anticipated that we would have it of course, but maybe not of this magnitude. But one mustn't forget that we went into kind of a complete stop in April and we went very far in cutting everything, I mean, even sort of going to large supporting spend, if I put it like that. That, of course, has to come back as the economy opens up and the countries opens up. We don't have a specific guiding for that part of it. We only have a guidance for the short-term working weeks. And that stays on SEK 1.5 billion. Of course, there will be discretionary spend savings, but we have chosen not to give any specific number on the other part.

[Andreas Juhani Koski, Analyst]

Yes. That's very clear. And then could I just follow up on the separation of Sandvik Materials Technology? Can you explain what the process will look like from here?

[Stefan Widing, President, CEO & Director]

Yes. So I mean we have always said, first, we will complete the internal separation. And now, as I said, because of some delays, that's -- end of Q3 is the current plans. We should have all the legal entities set up in the countries that is still behind on that. And then the Board will discuss a potential next step. And there isn't a firm date for that, but we have said that we will do it when the internal separation has been done. So I would say, I used to say late summer, now I say in fall then because we are a little bit delayed. So we have to complete that process, and then we'll have a discussion on how we move forward.

[Andreas Juhani Koski, Analyst]

Okay. And when you joined as the new CEO of Sandvik, you said that you were going to form your own opinion on what you think about Sandvik Materials Technology and if it belongs within Sandvik. Are you done with that? Or -- and are you going to communicate that? Or is that -- are we -- do we have to wait for the Board decision or...

[Stefan Widing, President, CEO & Director]

Yes. I think -- I mean, I've more or less formed my opinions on this. And again, I want to repeat the first part here, which is that I can also confirm that I think SMT is a good business, leading innovation, high-performing compared to its peers. Whether it should stay in Sandvik or not, that's a dialogue I'm initiating with the Board, and we will have that discussion in terms of reaching a conclusion after the internal separation has been completed.

[Andreas Juhani Koski, Analyst]

Very clear. And then my last question is also on SMT because you said that you have had some cancellations and delays in your oil and gas business. And to me, that is a bit concerning because I guess that the oil and gas business is the most profitable part of SMT. Would you say that if you would exclude the oil and gas business, is SMT still profitable? Or are the other parts making a loss?

[Stefan Widing, President, CEO & Director]

No. No, no, they are still profitable. Absolutely.

[Operator]

Our next question comes from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

Can you give us some more details about the new Sandvik manufacturing solutions you need, what's focused on software and additive manufacturing? I'd like to get your thoughts about what's the addressable market size, the profit pool, the growth potential. And also, how do you appreciate the current situation in terms of the group's ability to make acquisitions in those areas in terms of the current price for the potential acquisitions, in terms of the potential return on the acquisitions as well?

[Stefan Widing, President, CEO & Director]

Yes, sure. So it will -- this segment will contain what was previously 2 divisions, AMT and additive. We are working on the restructuring of that as well. So that's not necessarily how it will look like going forward in terms of the divisional split. I don't want to comment here now on the addressable market because I think one of the work we have in front of us now is to define the subsegments in the areas they address more because if you just take the addressable market and you add additive, metrology, design and planning software, it becomes huge. But that's not really the addressable market that we will have. So I would like to come back on that when we have done a little bit more work in that area both on our own strategy and defining also exactly what segments we will address going forward. When it comes to ability to for acquisitions and so on, I'm quite positive. It's an area where there are definitely targets and ability to do acquisitions. It comes back to my first comment that we ourselves have some homework to do for the remainder of this year to be more specific on what parts here we're going to address. So we don't go too wide or go in every direction just to find acquisition targets. But no, overall, I'm positive. This is -- that's why we do this, because I see there is potential. I want to increase the speed and focus of the execution here. So we're going to have a dedicated team, and I will be closely involved in myself initially to do this.

[Gael de-Bray]

Okay. So we can expect more about this at CMD, I guess?

[Stefan Widing, President, CEO & Director]

Yes.

[Emelie Alm, Investor Relations Officer]

Thank you, Tomas, and thank you, Stefan. We will now close the call for this time. May I please remind you that our Capital Markets Day will be held as a virtual event on 3rd November this year. So thank you all for joining and see you soon.